Tech Companies Have Supply Chain On Their Minds

Supply chain issues are one of the biggest concerns for U.S. technology companies, according to a study by consulting firm BDO USA. Of the 100 largest publicly traded technology companies analyzed, 86% point to supply chain challenges, including supplier relations, distribution and material costs, as a top risk factor, reflecting a 15% increase over 2010 (75%).

With worries over product quality and inventory levels mounting, technology companies are also significantly more preoccupied with the inability to properly execute their corporate strategy (93%) than in 2010 (68%) or in 2009 (27%). This marks a significant change in comparison to the relatively consistent rate seen in concerns over industry competition (97%) and economic conditions (96%), which remain the top two most frequently cited risks this year.

“Concerns over the ability to execute corporate strategy have more than tripled in the past two years as companies are under pressure to get back into the game and stay ahead of the competition,” says Aftab Jamil, partner and national director of BDO USA’s Technology & Life Sciences Practice. “Still, executives are approaching growth initiatives with a ‘lessons learned’ attitude and are honing in on the supply chain to safeguard against operational pitfalls that could lead to business interruptions or delays.”

Further findings from the BDO risk factor study include:

Supply chain concerns threaten from all angles. As technology companies seek to secure business strategy goals, logistical interruptions or delays are seen as a major threat. Seventy-five percent of companies cite equipment failure and delays as risks, up from 2010 (64%) and 2009 (58%). The potential disruption to factories and distribution channels as a result of natural disasters and geopolitical issues is also a heightened concern for 81% of companies, up 26% over 2010 (55%). This marks a particularly notable jump, since these disclosures were made before the Japan earthquake. Companies are also significantly more concerned with the price and availability of raw materials (34%, compared to 19% in 2010) and balanced inventory (57%, up from 30% in 2010).

Regulation risks are on the rise. Tech companies are increasingly concerned over government regulation (the second most commonly cited risk factor this year at 96%, vs. 88% in 2010 and 81% in 2009). At the same time, uncertainty over the convergence of accounting standards and the final rule on revenue recognition is contributing to many tech companies’ (58%) concerns over compliance issues.

IP protection is key to preserving customer demand. As major players like Apple and Samsung pursue intellectual property (IP) infringement cases, companies’ concerns over IP protection (79%) are on the rise after falling from 86% in 2009 to 74% in 2010. IP risks also factor into escalating concerns over legal proceedings (86%, up from 80% in 2010), as well as rising concerns over innovation and new product development. Markedly more companies (85% vs. 63% in 2010) cite the ability to satiate customer interests and demand for innovative products as a major risk. Product transition also continues to be particularly worrisome (88%).

Infrastructure issues raise threat of security breaches. Concerns over the ability to maintain operational infrastructure were cited by more than two-thirds (68%) of tech companies this year, representing 62% growth over 2010 (42%). Amidst reports of recent data thefts at Amazon and Sony, security breaches are a main cause for anxiety with 57% of companies citing it as a risk, up from 2010 (44%) and 2009 (30%).

M&A risks remain high amidst liquidity concerns. With a record 881 completed tech deals during the first quarter of 2011, 85% of companies note concern over the inability to successfully complete merger & acquisition transactions and other divestures. While deals are up, recession-era concerns over liquidity linger in 10K reporting (68%).

Top 20 risk factors cited by the 100 largest U.S. technology companies:

2011 Rank

2011

2010

2009

1.

Competition and consolidation in tech sector; pricing pressures

97%

94%

97%

2.

U.S. general economic concerns

96%

93%

85%

2t.

Federal, state or local regulations

96%

88%

81%

4.

Failure to properly execute corporate strategy

93%

68%

27%

5.

Failure to develop or market new products or services

88%

94%

91%

6.

Legal proceedings

86%

80%

68%

6t.

U.S. and foreign supplier/vendor concerns, supply chain issues

86%

75%

78%

8.

Management of current and future M&A or divestitures

85%

86%

86%

8t.

Threats to international operations

85%

83%

90%

8t.

Predicting customer demand and interest, innovation

85%

63%

62%

11.

Ability to attract or retain key personnel

82%

83%

82%

12.

Natural disasters, war, conflicts and terrorist attacks

81%

55%

60%

13.

Intellectual property infringement

79%

74%

86%

14.

Equipment failure and product liability

75%

64%

58%

15.

Cyclical revenue and stock fluctuation

70%

57%

83%

16.

Inability to acquire capital or financing

68%

55%

42%

16t.

Inability to maintain operational infrastructure and systems

68%

42%

41%

18.

Labor concerns

61%

49%

22%

18t.

Credit or financial risk of customers, vendors or suppliers

61%

48%

33%

20.

Accounting, internal controls and Sarbanes-Oxley compliance

58%

54%

62%

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